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Sep 11, 2018

Low rates adding risk to global financial system, CIBC CEO says

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Canada should boost immigration and competitiveness to shield itself from the rising risks of low interest rates, according to the head of the country’s fifth-largest lender.

“Interest rates have been very low for a very long time. Perhaps too long," Canadian Imperial Bank of Commerce Chief Executive Officer Victor Dodig said Tuesday in a Toronto speech. “The same low-rate environment that helped the world recover from the crisis of 2008 is now infusing risk into the global financial system -- and could generate headwinds for us."

Debt, productivity and competitiveness were the themes of a speech by Dodig, 53, in which he called on the federal government to do more to insulate Canada from potential economic headwinds a decade after the global financial crisis.

Global debt increased by US$25 trillion between March 2017 and March this year -- lifting total personal, government and corporate debt to about US$247 trillion globally, Dodig said. Emerging countries have borrowed in U.S. dollars to finance growth and development, drawn by low interest rates, Dodig noted.

“The U.S. dollar is strengthening and interest rates are going up," he said. “This has caused turmoil as equities in some emerging markets have fallen sharply as investors flee to less risky alternatives."

Emerging Markets

He’s seeing some similarities today in Turkey, Argentina and Indonesia to 1998, when substantial foreign debt fueled currency depreciation that added to economic stress.

“Many did not and do not fully appreciate the implications of the foreign-denominated debt issue," Dodig said. “There has been tremendous growth in the debt market, and cracks are starting to appear in certain areas."

Canada can insulate itself from the next economic slowdown by doing more to expand the economy and focusing on long-term competitiveness, the CEO said. Increasing immigration is a good place to start, he said.

Canada also needs to attract more foreign investment. A drop in foreign direct investment to the lowest level since 2010 is partly due to U.S. tax cuts and regulatory rollbacks, as well as trade uncertainty, but Dodig also points to internal factors, including debate over Trans Mountain Pipeline.

“The ongoing conflict broadcast to the world, sends a message of uncertainty," he said.

Trade Barriers

Dodig said business leaders and clients around the world tell him the same thing about Canada: the regulatory burden is too high and lack of clarity on foreign investment rules are hampering their ability to invest.

He said Canada can do three things to improve competitiveness: the federal government should let companies expense capital investments with a one-year period, like the U.S.; remove interprovincial trade barriers; and invest in infrastructure.

“Today, the global economy is strong,” Dodig said. “Our national economy is doing well. But there are economic storm clouds ahead, which suggest for both caution and action."